How to use big data to make better business decisions

March 1, 2013

Smart Business magazine; March 1, 2013

Business leaders often rely on intuition when making critical decisions, but according to The Economist Intelligence Unit, executives dramatically increase their chances of success when they bring facts and data into the decision-making process.

“Although beliefs and instincts help executives make expedient decisions, they aren’t always good decisions,” says Dr. Chongqi Wu, assistant professor of management for the College of Business & Economics at California State University, East Bay. “Business leaders become better decision makers when they take advantage of the facts derived from data analysis.”

Smart Business spoke with Wu about the benefits of incorporating big data and analytics into the decision-making process.

Why is fact-based decision making superior?

Although intuitive decision making is simplistic and quick, a lack of underlying data makes it hard for executives to diagnose and correct problems when something goes wrong. Instead of compounding the problem by making another bad decision, executives can drill down into the data to determine the cause of misfires and use factual analysis to set a new course. Actually, studies show that cumulative improvement is hard to obtain when executives react to problems instead of using facts to make prudent business decisions. And since most of your competitors are probably using data, companies that base decisions on gut feel or instinct are at a competitive disadvantage.

What types of decisions or problems are best solved by big data?

In general, data-driven decision making works better at an operational or tactical level since there are relatively fewer risks involved. In fact, when aided by technology, data makes it easy to automate rudimentary tasks and decisions.

Conversely, strategic decisions still require intuition and judgment, but injecting data analysis and modeling into the process can significantly improve the odds of success. Don’t think of gut-based and fact-based decision making as competing concepts because they actually complement each other. For instance, cross-functional teams often use data to project outcomes and validate the return on proposed programs or new products. It also helps diverse teams build consensus by using facts instead of politics and personal preferences to reach conclusions. Strategic decision making still requires risk taking, and success may hinge on market timing, execution and luck. Data just makes executives better gamblers.

What’s the best way to incorporate data into the decision-making process?

First, executives need to lead the way in supporting cultural change by acknowledging the importance of data in the decision-making process. Next, use data modeling to project probable outcomes and evaluate ideas, since facts and knowledge generated from analyzing big data provide a common ground on which ideas can be debated. Finally, force your team to analyze data by asking questions during the evaluation process so they learn how to marry facts and instincts.

Do executives need copious amounts of data to conduct modeling and analysis?

It’s hard to estimate, but simply put, gather as much relevant data as possible. However, there’s no reason to wait; start small and start immediately because there’s no need to invest in expensive systems or software. Purchase information from third parties, tap free sources to validate ideas, use economical cloud services and software as a service programs to analyze information, and begin collecting in-house data. Finally, run an experiment or test to see how much data you actually need to project the return on a small marketing project or idea.

How can executives gain the confidence to make data-backed decisions?

Even though great decisions don’t always produce great outcomes, you’ll gain confidence by realizing that great decision gives you the best chance to succeed. For example, it’s a great decision to have Kobe Bryant take the final shot when the Lakers are behind because, with a career field goal percentage of 45.4 percent, he gives the team the best chance to win. But data also shows he’ll miss about 55 percent of the time. Luck and timing still play a key role in determining success.

Dr. Chongqi Wu is assistant professor of management, College of Business & Economics, at California State University, East Bay. Reach him at (510) 885-3568 or chongqi.wu@csueastbay.edu.